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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Commodity ETF flows: Investors shift from specific to wider exposure
Ole Hansen
Head of Commodity Strategy
Summary: In recent weeks, the commodity sector has displayed a cautious approach, after witnessing a significant rebound in June and July. This recovery was characterized by notable increases in the energy sector, particularly natural gas and diesel. However, these gains were counterbalanced by declines in both precious and industrial metals, as well as grains. Examining the latest trends in ETFs, there's a notable withdrawal from gold and, unexpectedly, from crude oil. Meanwhile, interest has concentrated on ETFs that provide a broad exposure to the commodity sector.
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Global Market Quick Take: Europe
The commodity sector has shown a defensive stance in recent weeks, following a robust recovery in June and July. During that period, the Bloomberg Commodity Total Return index climbed to its highest level in five months, marking a 12% increase from its lowest point in 16 months. However, since that peak, confidence has been shaken due to renewed concerns about China's prospects, given it's the world's largest consumer of commodities. Added pressures come from a strengthening dollar and increasing Treasury yields, fueled by speculations that the US Federal Reserve still needs to make more interest rate hikes to effectively manage inflation.
Strong gains in energy, led by natural gas and diesel have so far helped offset losses, not only in metals, both precious and industrials, for the reasons mentioned above but also the grains sector where improved crop conditions have raised production forecasts ahead of the coming harvest. Strongest of them all has been EU TTF gas, a contract that is not included in the BCOM index, which has surged 50% on concerns that a yet to be confirmed strike action at LNG export plants in Australia will lower the availability of LNG, thereby boosting competition for deliveries between the main buyers in Asia and Europe.
The table below show some of the world’s largest and most actively traded commodity ETF’s, their recent performance and not least recent investor flows. There are many ETFs tracking commodities so the list is by no means exhausted and should primarily be used for information and inspiration.
The first section are UCITS-compliant ETFs and are based on an EU directive that provides a regulatory framework for funds that are managed and based in the EU. A UCITS fund can be marketed to and traded by private investors because it adheres to common risk and fund management standards, designed to shield investors from unsuitable investments.
The second part of the table shows mostly US listed, and therefore non-UCITS compliant ETFs. It’s among this group we find some of the world’s biggest ETFs in terms of market cap, led by the GLD and IAU, two ETFs that tracks the performance of gold. It is also worth noting that due to changed taxation rules by the US Internal Revenue Service from January 1, 2023, Saxo no longer offer access to cash trading in PTP securities as non-US persons in general will incur an added 10% withholding tax on gross proceeds from the sale, trade, or transfer of U.S. PTP securities. A change that undoubtedly increased the popularity of European issued ETFs as non-US investors have either opted to close or switch their exposure to similar ETFs outside the US PTP framework.
We chose to show the PTP registered ETFs given the signal value they can provide, but also the fact that traders understanding the added risks of holding leveraged positions can still trade these as CFD’s.
Looking at recent flows we find, not surprisingly, the biggest reduction in holdings has been seen among ETFs that tracks the performance of bullion. Investors in these products have been net sellers for the past three months and driven by rising opportunity costs compared with the +5% investors currently receive on short-term interest rate and bond products. In addition, gold is also weighed down by the continued delay in the timing of peak rates as the FOMC stays focused on combatting inflation through higher rates. Developments that have triggered a reduction in exposure, even from asset managers who potentially maintain a long-term bullish view on gold, but where the timing of entry has become increasingly important given the mentioned funding cost of holding a position.
Somewhat surprisingly we have also seen a rather significant reduction in ETFs tracking the performance of crude oil, both Brent and WTI. Potentially driven by investors booking some profit following a strong rally to help offset losses elsewhere, or simply that investors despite the current tight market conditions courtesy of Saudi production cuts are concerned about continued macroeconomic headwinds.
Looking at which ETFs have attracted fresh investments it is however clear that investors for varied reasons continue to seek commodity exposure, either in the belief supply tightness may underpin prices despite growth concerns or as a potential hedge against sticky inflation.The result being a month where funds have flowed from specific commodity exposures to a broader one that can be achieved through ETFs that tracks the whole commodity sector. The top three UCITS Eligible ETFs that have seen the biggest inflow this past month all tracks' the Bloomberg Commodity Index which includes a basket of 24 major commodity futures spread evenly between energy, metals and agriculture.
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